By David Roche
The reality is that extraordinary monetary policy measures have become ordinary. That does not mean that central bank arsenals are empty, but rather that the next round of measures must be extraordinarily extraordinary.
The most immediate extra extraordinary tool proposed is ‘helicopter money’ whereby a central bank opens an account for the government and buys perpetual zero interest rate sovereigns with money created and credited to the account. Or a government can simply avail itself of the funds deposited in that account, as you or I do with our bank deposits.
We are told that, unlike QE – which is finite and reversible and has succeeded in boosting asset prices more than the economy – helicopter money has two advantages. First, it will result in a direct boost to aggregate demand as governments will spend it.
Well, that depends on how a government spends. If it’s on infrastructure, then true enough. However, if it’s on social transfers (on which elections are more often won or lost), it could get saved, compounding the excessive private-sector savings problem, or flee the country.
The second touted benefit over QE is that helicopter money will be permanent. Well, it can’t be while still preserving the independence of central banks, which to be ‘independent’ have to be able to turn the spigots on and off as economic conditions require.
Central banks are the guardians of good money. But they are also the repositories of a nation’s worst nightmares. Central banks are there to see that a nation’s nightmare does not recur
The advantages seem dubious and the risks (loss of confidence in the currency, capital flight and uncontrollable inflation) loom large. One would need to have a lot of faith in the prescience and wisdom of politicians and central bankers to sign off on this almost virtual experience.
But let us leave the theoretical arguments aside. How likely is all this to happen? Central banks are the guardians of good money. But they are also the repositories of a nation’s worst nightmares. Central banks are there to see that a nation’s nightmare does not recur.
In the eurozone, and for the ECB, the nightmare was the hyper-inflation of the Weimar Republic. The Bundesbank is the implacable sentinel at the gate that will stand firm against any direct monetization of government debt. Helicopter money is also illegal, per se, in Europe. It would require a unanimous vote of all EU members to change the Lisbon Treaty to permit it. That is simply not going to happen.
In Japan, the national nightmare was the use of the BoJ to fund the war effort from 1936. Finance minister Takahashi Korekiyo resisted this and shortly thereafter was assassinated. He had previously used helicopter money (after 1931) as a means to lift Japan out of the global Great Depression. But he would not go along with financing the military build-up in this way.
To change the law and become the first country to legalise and implement helicopter money is simply too wrenching a step for a country where ritual is all-important. Of course, Japan has been a living example of helicopter money for a decade. But the illusory veil of legalism, with the BoJ buying government debt through commercial banks, has been preserved. That is vital in a society governed more by convention than by reality.
So, what can be expected is more of the same and increased talk of the ‘coordination’ of monetary and fiscal policy. That is probably enough to make the yen weaken in the absence of a risk-off environment that could be caused by Federal Reserve tightening. The Nikkei would benefit in a knee-jerk sort of way.
The US needs helicopter money like a hole in the head. Not only for economic reasons, but for practical ones – like the role of money market funds in the financial system. But the Fed is also the repository of the US nightmare of 1929 and the Great Depression. Any whiff of recession and helicopter money, which is, after all, an American intellectual invention, will be back on the table of policy options for the Fed.
My guess is that we are living in a world of slow recoveries that are sustainable, if limited in scope. The limiting factors are: legacy problems from the credit bubble; mispriced capital by the Fed; worsening demographics; and a structural decline in productivity.
But on balance the US is likely to continue to do better than most other economies. Unless Trump topples the apple cart.